Hon. Aditya Nath Mittal, J.
Heard learned counsel for the parties.
This income tax reference has been made by the Income Tax Appellate Tribunal, Allahabad Bench, Allahabad in R.A. Nos.4, 5 and 6 (Alld) of 1995 for the assessment year 1990-91 and 1991-92, CIT, Kanpur v. M/s Kothari Products Ltd., Kanpur for the opinion of the High Court on the following questions of law:-
"1. Whether on the fact and circumstances of the case, the Hon'ble ITAT was justified in holding that the Zarda/ Yukta, Pan Masala is not a tobacco preparation within the meaning of item No.2 of XIth schedule of the I.T. Act.
2. Whether in the facts and in the circumstances of the case the Hon'ble ITAT Allahabad has misdirected itself in holding that the ratio decidendi of the decision rendered by the Hon'ble Supreme Court of Inida in the case of Radhey Shyam, Gudakhu Factory State of Orissa, does not apply to the present time.
3. Whether on the facts and in the circumstances of the case, the Hon'ble ITAT has miscarried the facts of Radhey Shyam Gadakhu Factory Vs. State of Orissa and thereby erred grievously in not appreciating the true import and meaning of the test of essential and effective ingredient" as evolved by the Hon'ble Supreme Court of India, in the above mentioned case and thus misapplied the ratio to the facts of the instant case resulting in an unjustified and patently erroneous relief?"
M/s Kothari Products Ltd.-the assessee is carrying out the business of manufacture and sale of Pan Masala of various varieties including Sada Pan Masala and Zarda Yukta Pan Masala. It claimed deduction under Section 80-I of the Income Tax Act, 1961 (in short the Act) on the profit and gains derived from the industrial undertaking engaged in the manufacture and sale of Pan Masala. Besides deduction under Section 32 AB was also claimed on the amount utilised and purchased of new machinery and amount deposited in national bank as per Clause (a) and (b) of sub-section (1) of Section 32AB of the Income Tax Act.
It is admitted that the deduction under Section 80I and Section 32AB are available, unless the product so manufactured falls in the prohibited category as given in Schedule XI. Item 2 of the List of Articles or Things in the Schedule XI includes:-
"2. Tobacco and tobacco preparation, such as, cigars and cheroots, cigarettes, biris, smoking mixtures for pipes and cigarettes, chewing tobacco and snuff."
The deduction under Section 80I were denied to the assessee for the assessment year 1988-89 on the ground that it is manufacturing tobacco products.
It is submitted by Shri S.K. Garg appearing for the assessee that for the assessment year 1988-89 in RA No.242 (Alld)/1992 the question as to whether the Tribunal was justified in holding that Zarda Yukta Pan Masala is not tobacco preparation within the meaning of Item No.2 of Schedule XI of the Act and whether the assessee is entitled for deduction under Section 80I and under Section 32AB was considered and the reference application arising out of the order passed by the Income Tax Appellate Tribunal holding that Zarda Yukta Pan Masala is not tobacco and the assessee was entitled for deduction under Section 80I and 32AB was rejected on the ground that the findings of the Tribunal are findings of fact giving rise to no referable question of law. Against the order dated 19.8.1992 the CIT (Central), Kanpur filed ITA No.39 of 1992, which was also rejected on 18.7.1995. The Commissioner filed Special Leave Petition (CC) No.3095 before Hon'ble Supreme Court (for the assessment year 1988-89). In SLP (CC) 3095-96 by order dated 12.7.1999 the Supreme Court condoned the delay and dismissed the special leave petition.
The question of law raised in this reference were also raised, between the parties namely by M/s Kothari Pouches Ltd., Kanpur in Income Tax Appeal No.110 of 2001. On considering the questions this Court held as follows:-
"14. The order passed by the Supreme Court dated 18.7.1995 dismissing the special leave petition against the judgment of this Court is a non-speaking order and which does not show that the matter was considered on merits. Similarly the order passed by the High Court also does not show that any question was raised or considered. It was only an opinion of the High Court that no question of law arise, which was upheld by the Supreme Court. The question still remain undecided. In V.M. Salgaokar & Bro. Pvt. Ltd. v. CIT, (2000) 5 SCC 373; Kunhayammed v. State of Kerala, (2000) 6 SCC 359; U.P. State Road Transport Corporation v. Omaditya Verma, (2005) 4 SCC 424; Satrucharla Vijaya Rama Raju v. Nimmaka Jaya Raju, (2006) 1 SCC 212, the Supreme Court held that the dismissal of the Special Leave Petition in limine does not operate as confirmation of the reasoning in the decision sought to be appeal against. Such an order does not constitute law.
15. The deduction under Section 80I is provided on the income from the manufacture of the articles other than articles or thing in the Schedule XI and which includes in Entry-2; 'tobacco and tobacco preparations, such as cigars and cheroots, cigarettes, biries, smoking mixtures or pipes and cigarettes, chewing tobacco and snuff'. Pan Masala is not a mixture of tobacco but when it is mixed with tobacco, it becomes a tobacco preparation. In State of Orissa v. Radheshyam Gudakhu Factory (Supra), the Supreme Court held that 'gudakhu' is product of tobacco, and that although a major part of molasses and other constituents are added to the tobacco the essential and effective ingredient remains tobacco, and therefore 'gudakhu' is known as a product of tobacco in common parlance. The Supreme Court upholding the order of the High Court in which 'gudakhu' was referred as form of smoking tobacco held that even though it is used as paste for cleansing the gums of the teeth, it would still be regarded as a product of tobacco, which falls within the exemption covered by Serial No.35 of the Schedule of the Orissa Sales Tax Act.
16. We are unable to appreciate as to how this judgment in State of Orissa v. Radheshyam Gudakhu Factory (Supra) will help the assessee. The Supreme Court in this case was concerned with the meaning given to the word 'tobacco' in Item 9 of the First Schedule of Central Excise and Salt Act, and not 'tobacco preparation' and held that 'gudakhu' is tobacco preparation and thus not exigible to tax in Item 9 of the First Schedule to the Central Excise and Salt Act.
17. In the present case we are concerned as to whether 'Zarda Yukta Pan Masala' is a tobacco preparation. The percentage of tobacco in the mixture, is not material, in as much as once tobacco is mixed, even in a small quantity, the Pan Masala becomes a tobacco preparation, which is a separate and distinct commercial commodity and clearly identifiable to the consumers, who are addicted to tobacco.
18. In Item No.1 of the list of articles or thing in Schedule XI, the items include beer, wine and other alcoholic spirits. The percentage of alcohol in the spirits is not given. With the same object the percentage of tobacco is also not given in 'tobacco preparation'.
19. In Item No.2 the words 'such as' are indicative and inclusive and do not complete the list of tobacco preparations. For example cigarettes, biries and smoking mixtures for pipes and cigarettes, chewing tobacco and snuff are also tobacco preparations and not tobacco by itself. A variety of ingredients can be mixed together to form a tobacco preparations. The object of entry, is apparently to exclude rebates on manufacture of products, which are dangerous to health.
20. In J.K. Synthetics Ltd. v. Commissioner of Income-Tax, Kanpur, 1981 (130) ITR 23 (SC) The Supreme Court was of the opinion that the question as to whether Nylon-6 is petro-chemical is a question of fact and not a question of law. In a said case the Tribunal held that Nylon-6 is petro-chemical within the meaning of Entry 18 of 5th Schedule to the Act. The High Court had called for a reference on the question. Before deciding whether the question is question of fact, the Supreme Court had examined the findings of the Appellate Tribunal and held that it was not satisfied with the findings and thereafter held that the question had become academic as it had acquired finality.
21. For the aforesaid reasons, the question of law is decided in favour of the revenue and against the respondent assessee. The income tax appeals and income tax reference are allowed. The department will proceed accordingly."
The questions of law raised as above are covered by the judgment of this Court dated 16.10.2012. These questions are thus decided in favour of the revenue and against the assessee. The reference petition are decided accordingly and the matter is sent back to the department for consequential orders.
Dt.14.12.2012 SP/